I had an article in the Daily Mirror on Saturday on the tenth anniversary of Lehman and what it meant. You can read the online version here. This is a longer version:
On September 15 2008 the US investment bank called Lehman Brothers collapsed and most people agree that the Global Financial Crisis began. Ten years later that crisis has not really ended. Worse, many economists — me included - think a new crisis may be just around the corner. So what happened, why, how come we're still in a crisis and what might happen next time?
Lehman crashed for a reason. It had run out of money, and for a bank that's fatal. But it wasn't alone. Within weeks the crisis had spread. One fateful weekend in October 2008 then Chancellor of the Exchequer Alistair Darling was told Royal Bank of Scotland was within hours of also running out of cash. And RBS going down was not an option. Lehman Brothers was not a High Street bank. RBS was. So too were Lloyds, HBOS and Bradford and Bingley. All were heading the same way as Northern Rock ,which had collapsed a year earlier.
Darling appeared to have a choice to make. He could let the banks fail — as the US authorities let Lehman Brothers fail (although they saved a lot of other banks) — or he could bail them out, whatever the cost. But the truth was he had no choice. If RBS went down millions of people in the UK would see their bank accounts fail. They would literally have had no access to money. And that might also have been true of hundreds of thousands of businesses — some of which were very big.
What he also knew was that if a bank like RBS failed it was likely all the others would go down with it, they're all so enmeshed with each other as money flows between them continuously on behalf of us, their customers.
And the truth is that on average most British households have no more than three days food in stock. British people and British supermarkets without banks would have meant panic on the streets, food riots and no prospect of sorting the mess out for weeks — by which time who knows what might have happened? Certainly the army would have been called out and it's hard to imagine we'd have had enough troops to keep peace. Parents who can't feed their children are angry. And will do anything they can to make sure that they can.
So Alistair Darling bailed out the banks, as any responsible Chancellor would have done. Most of us have been paying for that ever since.
How much have we paid? Any figure will be an estimate but there's an easy way to guess. In the years 1998 to March 2008 the Labour Government borrowed a total of £186bn to keep the government and economy going. They prevented a recession after the dot.com crash of 2000 by doing so. In the ten years from April 2008 to March 2018 the government borrowed £990 billion - or more than five times as much. That almost certainly would not have happened without the crash. It's a very crude measure but the difference — or about £800 billion is one way of estimating the cost of the crash. Roughly speaking that's £25,000 a household.
How have you paid? The answer is through austerity. That's the deliberate policy that was chosen by the Conservatives (and their LibDem partners until 2015) that was supposedly designed to balance the government's books. £990bn of borrowing later that has clearly not happened. In the meantime public spending has been slashed. We see the result in schools, hospitals, the police, prisons, the armed services and most especially in benefits, because those least well off in the UK were picked on most by the three Conservative-led governments we have had this decade. Only two groups were protected. One was pensioners. And I cannot argue with that. The other group was bankers. And that was just wrong.
How did bankers benefit? That happened through a policy called quantitative easing. That's jargon for the government buying back its own debt — and almost all the benefit of that has gone to bankers who have used that money to push up house prices, share prices, and maybe even commodity prices for things like gas and electricity in which they trade. The result has been most banks have recovered to be seriously profitable again — and for bankers, unlike almost everyone else the pay rises and bonuses have flowed. And that is despite the fact that — and let's be absolutely clear about this — the bankers caused the crash.
They did this by reckless lending, mainly for mortgages that often exceeded the value of the houses that they were supposedly funding people to buy. That lending overheated the economy and - when combined with bankers using tax havens to hide the scale of their lending so that very few people appreciated the scale of the risk we faced — the bubble the bankers created had to burst in 2008. And it did. And we paid for it whilst the Conservatives put the bankers, like Humpty Dumpty, back on their wall again so they could carry on as before.
Which is exactly what they have done. And the bankers seem to have learned nothing. So right now there's as much bank lending to the UK public compared to our income as there was in 2008. Some is to fund another housing bubble. Some finances the new car boom — 9 out of 10 of which are bought with borrowed money. And some is just lending to people who cannot make ends meet because of ten years of no wage rises mean many households are seriously struggling.
The result is we're almost certainly heading for another crash. But this time the government can't slash interest rates — because official rates are still less than 1%. And some will say the government shouldn't borrow more this time because it already has (although I would disagree).
Whatever the technical arguments about what we'd do if there is another crash, what we do know are three things. The first is a crash is likely. Second, we seemed to have learned nothing from the last time. And so, the reality is that this one might be uglier.
Eight years of Tory rules have left a wrecked economy. For everyone but bankers that is. So the lesson has to be a simple one. Next time we bail out the bankers we must say never again: that's got to be consigned to history. No longer can we tolerate their recklessness of that of their friends in the Conservative Party. We need think out a new banking system. A new City of London. A new economy. A new approach to government finances. And we need to do it quickly. We might have to put it in place sometime very soon.
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Congratulations.
It is very good.
Spot on Richard, but how do we puncture the Tory lies and get this message to readers of the gutter press?
I got it to The Mirror – the best I could do
I’m still annoyed that none of these people ended up in prison.
The message is.. carry on, there are no consequences.
@ Paul
That’s the major failure of the Brown/Darling management of the GFC.
Quite simply, the Banks should have been told “No bail out without root and branch reform”.
RBS should have been fully nationalised, and turned into a regional investment bank, through its network of banks, with regional Boards to oversee their work, Boards which would have had a local democratic element through some electoral mechanism, direct, or indirect by the appointment of local Councillors/MP’s, or a mix.
Finally, there should have been, as in Iceland, prosecutions and imprisonment.
Alas, however, the Banks played the trick of the black Sherrif in “Blazing Saddles”, and, knowing they were “too big to fail”, followed the black Sheriff’s trick of putting his own gun to his head, so quelling the white riot with the plea “You wouldn’t want to see a poor old n***** die would you?”
Preposterous in the film, preposterous in the GFC, but alas it worked.
Andrew Dickie says:
“Preposterous in the film, preposterous in the GFC, but alas it worked.”
Spot on.
You can in reality fool ALL of the People ALL of the time. One or two voices are silenced by a howling mob of the deluded. Especially when the deluded are wilfully protecting their own interests and in a state of panic.
Brown and Darling walked away from the responsibility to see through the solution they had cobbled together. And now they are both of them intent on nailing Scotland to the whim of the bankers. And people pay massive fees to hear them spout their poisonous bilge as ‘elder satesmen’. God help us !
Oh man you’ve hit the nail on the head. I know bitterness and vengefulness are not worthy feelings but I really wanted to see a few of the guilty beautiful people taking the manacled walk of shame.
Slaine, not “vengefulness and bitterness”, but justice and as well as “pour encourager les autres”.
Though I realise that’s actually a poor reference, given that it refers to the exact opposite of what I’m saying, since it refers to picking out a victim at random, which would be “vengefulness and bitterness”, and injustice too.
But there’s nothing to prevent it from being used justly, for just causes!
I am not so much concerned about revenge but deterrent.
At the moment the worst these people can expect is that they get dragged into a select committee and made to apologise. Very worst case lose a knighthood.
One of the former HBoS senior managers has gone on to make ~£7m in his next role..
I half listened to Edwin Lane’s BBC World Service documentary “Iceland: What Happened Next?” https://www.bbc.co.uk/programmes/w3csxhj3 .
It was interesting as much for its omissions as for its content.
After Northern Rock, savers were reassured by the government’s guarantee, which covered not only the initial deposit but also the future interest of the Icelandic banks (and all the others). Taking advantage of that was part of their business model, and without it far fewer would have trusted them with their savings.
Iceland where bankers were jailed, not bailed out. And while the program emphasised the hardships Icelanders faced after their crash, it didn’t really look at the impact it had on ordinary peoples lives, and how much their suffering continues, but suggested they were on the way to a tourism driven recovery (https://www.bbc.co.uk/news/business-41725713), unlike the horrifying – not to say unrealistic – prospect you hold before us.
Lessons there for us?
Unfortunately to have a banker mentality is to have a perverse mix of smartness and stupidity but most of all it’s not to realise the value and importance of morality:-
https://www.thenewamerican.com/economy/markets/item/18520-central-banks-now-dominate-stock-market-study-finds
Society still hasn’t learned the lesson bankers with strong sociopathic dispositions tend to occupy senior positions in banking organisations and consequently need to be kept on a very tight democratic leash. As Liaquat Ahamed argues in his book “Lords of Finance” their power was such it led to the Second World War.
“Lehman crashed for a reason.”
Lehmnan crashed because it was hung out to dry as retribution for not chipping in to the pot when Long-Term Capital Management went belly-up. They were no more exposed than the other Wall Street players, but they had broken ranks.
Call that theory or call it fact…..in this day and age what’s the difference ? No one in the know will openly acknowledge either.
Yes. We do.
At the next crash, we need crack SAS and Marine units to march into all the headquarters of all the banks involved and march the senior white collar criminals responsible to Parliament where charges should be put to them.
Then – on the assumption of their guilt, they should be detained at the people’s pleasure until their case is heard in a proper court.
Then when found guilty, the State should seize all their assets for disposal – just like we would do with drug dealers and the like.
That is how to deal with the next crash in my view.
If we can lock pregnant women up for not paying their TV license or shop lifting, then we ought to be able to do what I have suggested – no problem.
Sorry.
What happened with innocent until proven guilty, that applies to everyone else?
Listen Tracey – go back and do research about the the 2008 crash – any crash – and you will find fraud.
Remember that the banking system froze and then Governments had to print money to unfreeze it because fraudulent practice based on Ponzi scheme (look that up Tracey) practices and poor (deliberately poor) risk evaluation in the pursuit of short term profit
The amount of QE created to replace the money that either froze or just was not there anymore (aided by corrupt accounting corporations and equally corrupt ratings agencies) is a testament to a criminal behaviour on a gigantic scale.
How much evidence do you need?
How many bankers went to jail? How many had their ill-gotten gains confiscated?
Has the US Government been made accountable to those in the world economy who suffered as the US deregulated its financial markets (because that’s where it all started and frequently does?). Have other countries applied to the UN for reparations from the USA? I would – and I’d like to know why this issue has not been pursued.
Has the US Government ever said ‘Sorry’?
And the general public around the world – most of whom had no part in 2008 – what do they get? I’ll tell you what they get, they get austerity and less than what they had before the crash.
And the people who created all of this – you say they deserve due process in law when they flout natural law every day they exist?
From what we know about that they do (and if it is an awful lot) I say to you that the presumption of guilt for these people is apt.
Sorry.
How else can money of that magnitude go missing? How can it be that pension funds and savings have disappeared? How come some of those banks have been taken to court by investors?
“At the next crash, we need crack SAS and Marine units to march into all the headquarters of all the banks involved and march the senior white collar criminals responsible to Parliament where charges should be put to them.”
Honest men and women with baseball bats would be an adequate force. But why present them to a corrupt and useless parliament where their friends hold sway ?
Half a job, Pilgrim. Keep working on it. 🙂
You aren’t feeling the anger yet.
I agree the banking system is market failure personified and although regulation is significantly better than 2008 the retail banking model is fundamentally flawed. Lehman and Bear Sterns went under but they were the only investment banks that did (without QE more would have obviously have followed). In retail banking it was far worse. Putting aside bad debts most Savings & loan entities in the US and Bank and building societies in the U.K. became insolvent due to their asset liability mismatch ie assets (mortgages predominantly being very long) and their assets (short term money market funding) being able to recall at short notice..nothing to do with neoliberalism or whatever but fundamentally the banking business model doesn’t work. I’m not saying this will cause a stock market crash but the model doesn’t work. Short of mortgage quotas or a change in attitude towards home ownership I have no solution however.
Where do you get this nonsense idea that banks hid their mortgages offshore in tax havens?!
Some evidence would be good!
Maybe yo are unaware of HBOS and Grampian
And Northern Rock and Granite
And so many others
Go and do some reading
Richard,
You obviously don’t understand how securitisations work! These mortgages were not on the NR balance sheet so there was nothing to hide!
Regardless, nothing was hidden as the full information about each and every mortgage was available to the investors FROM ALL OVER THE WORLD (hence the choice of jurisdiction to meet the requirements of multinational investors).
It is precisely because I do understand that I know a) either yoiu do not or b) you are misrepresenting the truth
Granite was a conduit for securitisation. The problem came when interest in Granite from investors dried up. Northern Rock was left owning unsold Granite (so therefore the underlying mortgages) on their balance sheet..the funding they received was from the short term money markets, and when this dried up Northern Rock became insolvent – hence my previous post about the asset liability mismatch of borrowing short dated and lending long dated…the mortgages themselves were, to use the US definition, sub prime (135% loan to value etc) so it was also a case of reckless lending meaning there was no bids. There was a lot of visibility on the underlying loan book, indeed a private equity firm i worked for at the time spent a lot of time analysing it with a view to bidding. Indeed this process continued at other firms the Granite book was finally bought by Cerberus.
Stuart Dawkins says:
“Where do you get this nonsense idea that banks hid their mortgages offshore in tax havens?!
Some evidence would be good!”
Watch this and try to continue to pretend it presents an elaborate fiction.
https://www.youtube.com/watch?v=np_ylvc8Zj8&t=2256s
tring
Then use the evidence presented to you every day and join some dots and stop trying to defend the indefensible as if everybody around you is stupid and you have some access to a deeper understanding, when in reality you are merely blind to the world you live in.
That’s my best suggestion.
If your ‘evidence’ is a YouTube video, then I think we can discount your understanding of the issues.
Try reading one of the GRANITE prospectuses for details of how the securitisation worked.
I did
I put them in the press
You know Granite was on balance sheet I presume?
If you don’t it’s quite amusing
“the full information about each and every mortgage was available to the investors FROM ALL OVER THE WORLD”
https://www.bbc.co.uk/news/resources/idt-sh/The_lost_decade
Alistair Darling, the then chancellor, said that he was amazed that when he asked the banks in Britain for a full inventory of the risks they faced, it was not available.
The mortgages weren’t on their books !
They were in the case of NR
Spot on Richard. Unfortunate the scrounger narrative is still all too prevalent. The Tories/Ukip and their mates in the press will blame any crash on claimants , the disabled, immigrants and public sector workers. That coupled with the rise of extreme nationalism and authoritarianism make the future a very scary place.
Must of the content on this thread but surely got to draw the line at the nonsense!
James says:
September 19 2018 at 8:40 am
“Must of the content on this thread but surely got to draw the line at the nonsense!”
????? Incoherent. What were you trying to say. Have another go. 🙂
Having another go, meant to say..
Most of the content on this thread is good but i would draw the line at ” blame any crash on claimants , the disabled, immigrants and public sector workers”
Its fair enough having some anger but better to challenge it more rationally. Otherwise just gets dismissed as mindless class warfare.
As usual Richard, you’ve not answered the question.
1. These assets weren’t on the bank’s balance sheets, the risks were sold on to other investors. Not sure use why you’d try to deny that truth?
2. Nothing was hidden as the full details of these securitisations are publicly available. potential investors had access to full details of each and every underlying mortgage. Not sure why you’d seeek to deny that truth?
With respect I exposed Northern Rock’s off balance sheet activities
They were on the NR balance sheet for all practical purposes
Ditto HBOS and Grampian
You are simply wrong
‘For all practical purposes’? What on earth do you mean?
Had every loan defaulted in the portfolio that would not have costs NR a penny- investors in the securitisations would have suffered the consequences, as exactly as the structure was designed to achieve.
I suggest you go and do your reading…
You have not
Stuart Dawkins says:
“As usual Richard, you’ve not answered the question.
Not sure why you’d seek to deny that truth?”
What’s in it for you, Stuart defending the criminality and corruption of the finance industry ? Pay well do they ?
Mephistopheles pays well too, or so they say.
If you have no knowledge of securitisations, what’s in it for you to defend Richsrd’s false claims?
Being able to explain how securitisation work isn’t defending any criminal activity that has taken place.
Stuart
I do not tolerate absuive comment between commentators – so that is out of bounds
Richard
You are back to your usual approach of making claims you can’t back up.
What ‘reading’ do I need to do to find out about the Granite securitisation?
As I explained before, the information is publicly available and the debt instruments were publicly traded.
Please provide a link to the information that you claim contradicts the known facts and which is the opposite of what investors in Granite knew about this structure.
You did not even know it was on balance sheet
Respectfully, you are clueless
I revealed that story – on this blog
Politely please go and waste someone else’s time with your partisan comments not based on facts
Richard,
Sorry if this has been answered before, but if the mortgages were put in a securitisation vehicle in Jersey, how can this be on balance sheet?
Because NR kept control
As it also turned out HBOS did
It was all a sham
Stuart Dawkins
Now come on. If you really knew what had happened in the mortgage backed securities market prior to 2008 you would have known that solid, investment grade mortgages (AAA) were mixed up with tranches of lower grade ones (more riskier BBB and lower) and then poorly valued by the ratings agencies at the higher rating as if 100% AAA. So much for clear info to the market.
We also knew that fraud in the US mortgage market (where qualifying rules were often flouted and teaser loans were made to people who were never ever going to afford the mortgages (and hadn’t even put up any security deposit) once the real interest rates kicked in added a further level of unknown risk to the banks and the investor.
Only a few investors who bet against these actually made loads of money when the system became undone in 2008. Banks were still selling what were now toxic assets up to the last minute to offload them from their books to pension funds which ended up taking the banks to court when they realised that the ‘assets’ (black holes?) they had been sold were virtually worthless.
Some banks have sold products to investors and then bet against that product to benefit them if it fails. Did they tell the investor that at the time of sale? No.
All of this is a matter of public record.
Your comments to Richard do not stand up because your position seems to be that markets provide perfect information to the investor. They do not. As Stiglitz and others have pointed out, markets are dominated by imperfect information (asymmetric in nature) with the seller often knowing more about the product than the buyer and not fully disclosing. The buyer is in the weakest position.
So unlike you assertion, buyers/investors do not therefore get the information they need when making investment decisions.
Stuart Dawkins says:
“If your ‘evidence’ is a YouTube video, …..”
And if your evidence is written on paper that makes it sound does it. ?
The message is the medium eh?
That whirring sound I can hear would be the mortal remains of Marshall McLuhan spinning gently, perhaps.